the right way to invest blog

Have you been following the advice, or maybe thinking about following the advice, of a stock market guru on your favorite news channel? Is he saying “this is the next Amazon” or is she saying “Get out now while you still have any money left!” Stock market gurus and professional stock pickers are just as good [bad] at predicting the future as you and me. Sure, they’re going to be right sometimes; when the outcome is up, down or flat, it’s not too tough to guess right. The main issue, however, is being consistently right, and no guru is consistently right. Are we reacting to a guru who guessed right or to a guru who guessed wrong? This short article expands on the psychology behind why us humans seek out those we think can predict the future – and how the reason for that mentality is because we crave certainty in an uncertain world. When we react to uncertainty, we could run into major problems that could seriously derail our retirement aspirations. Instead of being reactive we need to be proactive with an investment philosophy rooted in decades of academic research; an investment philosophy that says we can’t predict the future, but we can prepare ourselves for how we handle the unpredictable future. When we face uncertainty, we don’t want to rely on the so-called predictive powers of someone we see on TV, instead, we want to rely academics, research, and data because over the long-term – and remember we invest for the long-term, not the short-term – they provide the certainty we crave in an uncertain world.

Here you'll find the Q4 2017 Quarterly and Year End 2017 Report. In it you’ll find a summary of returns of various major markets around the globe for Q4 and the entirety of 2017. It was a very good year for major markets; you can see this on page 21 in the attachment, and I have pasted the table below, as well.

We should have put all of our money in emerging markets, right – we would have got the best return? Wrong. We don’t know which markets are going to do great and which ones are going to fall off a cliff (see emerging markets 2008: down 53%!). We like seeing all green arrows pointing up, but the reality is this isn’t going to happen every year. Most years will be a mixed back of up and down returns and there will be years when we see all red arrows pointing down for our stocks holdings. This is investing. We don’t know which market is going to be great or terrible, and we don’t know if we’ll get all green arrows or all red arrows, so we need to have exposure to everything, so we can participate in their returns when they are great. And when those returns are bad, we know it’s a short-term bump in the road on the long-term journey towards building wealth for retirement. Over your long-term wealth building journey, you’re gonna see a lot more green arrows than red, so you need to be invested – and remain invested – or you’ll miss a once in a lifetime trip.

I encourage you to give this DFA article a read. The answers to the article’s nine questions for the long-term investor are at the foundation of our investment philosophy, a philosophy which guides the construction, investment selection and ongoing monitoring of your retirement portfolio. You can read our investment philosophy here.

Some Wall Street pundits and stock market investors like to have a catchy saying to offer a sort of predictive power and a guide to how and when to invest. “Sell in May and go away” implies to get out of the stock market in May and take the summer off only to jump back in after the summer vacation is over.

With the New Year here, how does “As January goes, so goes the year” hold up to predicting how the rest of the year’s stock market returns will be based upon the return of the stock market in January? The suggestion is that if the stock market has a negative return in January then we’re in for a negative return year.

The data in this article shows the monthly returns of the S&P 500 Index for each January since 1926, compared to the subsequent 11-month return (February – December). A negative return in January was followed by a positive 11-month return about 60% of the time, with an average return during those 11 months of around 7%.

Conclusion: the long-term health of our retirement portfolio should not be predicated on the whether the first month (or any month for that matter) is good or bad. From the article: “We should remember that frequent changes to an investment strategy can hurt performance. Rather than trying to bear the market based on hunches, headlines, or indicators, investors who remain disciplined can let markets work for them over time.”

connect

author

Michael Pensinger, CFP® is Owner and President of Pensinger Financial, Inc.

He grew up in Park Forest, Illinois and now resides in Lemont, Illinois with his wife, two children, and two dogs. Michael serves as Treasurer on the Lemont Area Chamber of Commerce Board of Directors and he volunteers for the Lemont Open Space Committee. Read More